Which Assets Have Priced In A Chinese Economic Collapse? Barclays Explains

Saturday, November 28, 2015
By Paul Martin

by Tyler Durden

On August 11, the day Beijing shocked the world by devaluing the yuan, a whole host of commentators suggested that the move was designed to bolster China’s bid for SDR inclusion.

To be sure, the timing would have been right. On at least two separate occasions in August the wires lit up with reports that the IMF was leaning towards making the RMB the fifth currency in the basket and with the official decision due in November, some believed China was simply trying to seal the deal by making it seem as though the market would play a greater role in determining the exchange rate going forward.

Of course that’s all nonsense. First, the market doesn’t play a greater role in the new FX regime. In fact, the market’s role is reduced. Previously, the PBoC manipulated the fix to control the spot, but now, the central bank manipulates the spot to control the fix and manipulating the spot means heavy-handed intervention.

Second, China’s deval has far more to do with a desperate attempt to boost the flagging export-driven economy.

Sure, the official headline GDP print can be whatever a bunch of Politburo central planners want it to be, but the reality (as measured by the Li Keqiang Index and by private economists outside of the bulge bracket) is that growth is nowhere near 7% and indeed, it might very well be that in times of rapidly declining commodity prices, China’s inability to accurately measure the deflator means real output would be materially overstated even if the NBS were putting out accurate figures otherwise.

The point here is that China’s hard landing has just begun and the 3% August deval was just the opening salvo in what will likely be a far larger effort to drive the yuan lower (remember, when Beijing burns through its reserves to support the yuan and close the onshore/offshore gap it doesn’t mean that China has changed its mind on devaluation – it simply means the deval will be conducted on the PBoC’s terms, not the market’s) and thereby boost the export-led economy. The country’s acute overcapacity problem combined with lackluster global demand and depressed trade (in relation to which China is both the proximate cause and a victim) mean that things are likely to get far worse before they get better and we’re starting to see the ripple effects in the country’s onshore bond market where defaults are becoming increasingly common as the country approaches its dreaded Minsky Moment.

So if we assume that China’s hard landing can and will get hard-er-er, it’s worth asking which assets and currencies have priced in a further deceleration in the world’s engine of global growth and trade. Here’s Barclays with more on what’s expensive and what’s cheap vis-a-vis persistent deterioration in the Chinese growth story.

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